Monday, 23 April 2012

Connect the dots

The Canterbury District Health Board is starting to worry about the health consequences of overcrowded, damaged homes on the east side of town. The government's payouts in the red zone are generous - owners have the option of selling out to the government at the property's rateable value, or selling only the land to the government at its rateable value and settling with the insurance company for a repair or rebuild payout. But land values on the east side of town were never very high and new sections aren't cheap. Some on the east side can take out mortgages after using their red zone payout as down-payment, but that's a tougher option for the retired or for those who hadn't yet build up much equity.

What sections are going in are catering for folks a bit higher up the income distribution. Those wanting to move salvageable homes off of damaged land aren't having an easy time of it. David Haywood wanted to move his old Avonside villa to a new section but found covenants on most developments prevented it.

However, most Canterbury subdivisions forbid relocations among rules aimed at maintaining values.

"You have to build with new materials, so relocating would be a breach of the covenant," he said.

"Ninety-nine per cent of subdivisions in Christchurch don't allow it, so for anybody wanting to shift their house, that could be a difficulty for them."

...

Red-zoners David Haywood and Jenny Hay hunted unsuccessfully for a Christchurch section for their Edwardian Avonside villa, and will now shift it to Dunsandel instead. They found even small, private subdivisions in established neighbourhoods had restrictive rules.

"All the land is now stitched up in these covenants.

"The only land you can get has some weird problem, like high-voltage power lines or contamination, or was 50 minutes out of town," Haywood said.

Some subdivisions also restricted the size, weight and breeds of pets, banned cars more than 3 years old and dictated paint colours. He described them as an "outrageous intrusion on individual rights".

About a dozen others from their neighbourhood had wanted to shift houses out of Avonside but had given up, and their homes would now be demolished.

So, why would developers put in covenants precluding people from moving in older houses?

Imagine that there are a few different tiers of buyers. The top tier couple of tiers are willing to spend an awful lot to make sure that they don't have any neighbours from the next tier down.* There's some risk that somebody from a lower tier will luck into a bit of wealth that might let them afford a house outside his tier but subsequently not be able to maintain it. Covenants that impose ongoing costs, like banning older cars, can help ensure the separating equilibrium holds. Restrictions requiring new construction of particular standard rather than moving in houses from elsewhere serve similar purpose. And neighbours willing to put up with a pile of seemingly arbitrary restrictions are probably also pretty good rule-followers on other margins, like noise ordinances.

In a well-functioning property market, this just means you wind up with rich neighbourhoods with expensive covenants, some middle-tier ones with weird restrictions, and other neighbourhoods of rather more mixed character. But when tight restrictions on how much land can be opened up for development at all are combined with a pretty big jump in demand for new sections, the marginal section can earn rents by putting in the kinds of restrictions that the richer tiers value. So we don't see many developments where David could move his house.

It's remarkable that Council has chosen to keep zoning sufficiently tight that we're exporting houses from Christchurch instead of moving them to new parts of town. I know a lot of folks get their backs up about the idea of sprawl. But, sprawl doesn't have to be as costly as people imagine. Municipal utility districts can help new section buyers bear the development costs over time. And congestion charges are a good idea regardless of zoning changes. But even if neither of those worked, is a bit of sprawl really worse than the current relevant alternative?

* This doesn't have to be true of all buyers. But so long as somebody with a subdivision can make more by putting on a covenant than by not, expect covenants.